Decimalization and Market Quality

Robin K. Chou and Wan-Chen Lee
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Robin K. Chou: Department of Finance, National Central University, Taiwan
Wan-Chen Lee: Department of Finance, Ching Yun University and Department of Finance, National Central University, Taiwan

Chapter 9 in Advances in Quantitative Analysis of Finance and Accounting:Essays in Microstructure in Honor of David K Whitcomb, 2006, pp 175-194 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe study the impact of decimalization on the New York Stock Exchange (NYSE). Empirical results indicate that spreads decrease significantly after decimalization, but the market depth and average volume per trade also decline significantly. It is likely that more front-runners are entering the market. We test the degree of front-running surrounding decimalization directly and confirm the conjecture. Furthermore, stocks with different characteristics have different reactions to decimalization. Our results lend support to multiple optimal tick sizes for stocks with different characteristics, instead of a uniform minimum tick size for all stocks.

Keywords: Liquidity; Volatility; Limit Orders; Microstructure; Trading Structure (search for similar items in EconPapers)
Date: 2006
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